Japan Exchange Group's Q4 Result in Line With Guidance

Japan Exchange Group’s fourth-quarter result was largely in line with March guidance and our expectation. We reaffirm our JPY 2,300 fair value estimate and believe the exchange is slightly undervalued after the recent decline in its share price. There is no change in our long-term view on the wide-moat-rated exchange though our forecasts are adjusted to factor in higher capital expenditure in the next three years. The latter was guided for in the exchange’s fourth medium-term management plan, which covers its strategy over the next three years. A higher level of investment was expected, given Tokyo Stock Exchange’s outage in 2019 and trading and clearing platforms being the core operational infrastructure for the exchange. The investments are expected to support fundraising by companies, and the exchange is targeting a 30% increase in average daily trading value and net assets held in exchange-traded funds. The increase expected excludes holdings by the Bank of Japan. The exchange is also targeting 20 listings by foreign companies and an extension of trading hours by developing a new cash equity trading system. In our view, the latter should directly increase trading volume and income for the exchange. An extension of trading hours for the derivatives market would lead to increased activity in the aftermarket night session, which covers the European and U.S. time zones. Attracting foreign companies to list on the exchange may be more difficult to achieve, in our view, as the majority of its equity listings are domestic companies. The considerations on which exchange to list on varies depending on the individual company, but companies in the same sector or geography tend to list on the same exchange.